By: Dividend Sensei
In part one of these series I explained why many people are thinking about retirement the wrong way.
This article will explain why putting off retirement by a few months or even years may not be the curse that many people think it is. In fact it may be just the thing you need to maximize your happiness and standard of living in your later years.
Putting Off Retirement Just A Little Can Make A HUGE Difference
Many people hate their jobs and can’t wait to retire as early as possible. The earliest you can claim Social Security is 62. However keep in mind how those benefits are calculated.
“Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. We apply a formula to these earnings and arrive at your basic benefit, or “primary insurance amount.” This is how much you would receive at your full retirement age — 65 or older, depending on your date of birth.” -Social Security Administration
This basically means that the longer you work, the bigger your benefits will be. That’s because your income usually rises over time so working as long as possible gets you the maximum value for your primary insurance amount. In addition you usually get 8% more per year (paid monthly) for each year you postpone claiming benefits up to a maximum age of 70. The good news is that you don’t necessarily have to put off retirement by years to get a significant benefit to your standard of living. A study by the National Bureau of Economic research found that even putting off retirement by a year can make a huge difference.
“A 66-year-old worker who works one year longer and claims Social Security one year later sees a 7.75 percent rise in his inflation-adjusted retirement income, 83 percent of which comes from the rise in Social Security benefits.” – National Bureau Of Economic Research
That study was based on an adult age 36 who contributed 6% of their pay to a 401K and received a 3% company match resulting in the equivalent of saving 9% of their income. Basically the study found that the combination of one extra year of earnings, plus the 8% boost from Social Security benefits was nearly three times as powerful as increasing one’s savings rate by 1% per year over 30 years.
But here’s the big takeaway. Even postponing retirement by just three to six MONTHS provided retirement income benefits equal to a 1% increase in savings over 30 years. This should hopefully help alleviate your concerns about potentially having to work just a little bit longer. However there’s also a potential way to optimize both your happiness and standard of living in retirement that many people don’t consider.